Perils of a “No Deal” Brexit: Opinion 1/17 and the Case of CETA

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6 February 2019

Professor Erika Szyszczak is a Professor of Law at the University of Sussex and Fellow of UKTPO.

The UK Government and Parliament are mired in political manoeuvres on what the post-Brexit trade landscape should look like, but it is business as usual in the European Courts, with a salient reminder that a “No-Deal” Brexit could leave the UK waiting for many years for a legally certain trade agreement with the EU. In an Opinion, delivered on Tuesday 28 January 2019, Opinion 1/17, Advocate General Bot indicated that EU trade agreements must be compatible with EU law and fundamental rights provisions, especially the Charter of Fundamental Rights of the EU, and, at a practical level, any new form of dispute resolution contained in a trade agreement should be

“… consistent with the structural principles of the EU legal order and which, at the same time, may be applied in all commercial agreements between the European Union and third States” (§86).

Background: Investor Dispute Mechanisms and the Battle of the Courts

As a consequence of the Lisbon Treaty 2009, the external trade policy of the EU, including direct investment, is an exclusive competence of the EU. But this competence is not immune from interference at the Member State level. A case of interest for the UK, if it is obliged to negotiate a Free Trade Agreement (FTA) from scratch, is an Opinion requested by the Belgian government on the compatibility of the EU-Canada Comprehensive and Economic Trade Agreement (CETA) with EU law.

Ideas of a Canada ++(+) trade agreement have been considered by the UK, but it has not been plain sailing getting the Member States to agree to the original CETA. In 2016, a number of Regions in Belgium, led by Wallonia, refused to authorize the Federal Government of Belgium to sign the CETA, stating that the Agreement lacked guarantees on social, health and environmental issues. They also challenged the creation of an Investment Court System (ICS) to handle investment disputes. This led to a delay in the signing of CETA, although the Agreement was able to enter into force provisionally on 21 September 2017, with the exclusion of the ICS and other provisions challenged by the regions.

The EU has adopted a new approach to handling investment disputes in modern FTAs, inter alia, with Canada, Vietnam and Singapore, by adopting a model of an Investment Court System (ICS). This is in response to criticisms of the lack of review of traditional ad hoc Investor-State Dispute Settlement mechanisms using arbitral tribunals which often lacked transparency and consistency in the award process. The new approach of the EU is to create a permanent court where the members are impartial and independent and appointed by the States which have signed the FTA. There are also appellate mechanisms included in the new system. But there is no provision for the ICS to refer a question to the European Court of Justice (CJEU). In practice, this would be difficult to include in a FTA since the contracting State would expect a reciprocal mechanism for a question to be referred to its own highest court. And, as AG Bot notes:

“this would run counter to the purpose of the dispute settlement mechanism, namely to be neutral and independent from the domestic courts and tribunals of the other Party” (§182).

The Walloon Region put political pressure on the Belgian government to refer the validity of the CETA, especially the role of the ICS, to the CJEU.

The idea of creating new supra-national courts and the issue of judicial supremacy is a sensitive issue for the CJEU. In a recent ruling, Achmea, there was a difference in the Opinion of the AG Wathelet in and the CJEU on the ability of the EU to agree to alternative courts for the resolution of issues which may affect EU law.

“The competence of the EU in the field of international relations and its capacity to conclude international agreements necessarily entail the power to submit to the decisions of a court which is created or designated by such agreements as regards the interpretation and application of their provisions, provided that the autonomy of the EU and its legal order is respected.” (§57).

Principle of autonomy of EU law (§§ 39-184)

On the compatibility of the of the ICS in the CETA with EU law, AG Bot takes the view that the ICS does not jeopardise the principle of autonomy of EU law and the CJEU’s exclusive jurisdiction over the definitive interpretation of EU law.

There is a potential asymmetry between the substantive and procedural level of investment protection existing within the EU and within a third State and this “necessitates the negotiation of a common standard of substantive and procedural protection” (§87), including a neutral dispute settlement mechanism. Even if EU law could offer a sufficient level of protection to foreign investors who invest in the EU, a reciprocal mechanism is necessary in order to ensure the protection of EU investors investing in third States. The lack of direct effect of CETA in the national courts results in investors being unable to demand the standards of protection set out in the Treaty to be applied at the national level.

AG Bot distinguishes the ruling in Achmea, by arguing that the premises guiding the line of reasoning would be different since, in Achmea, the Court’s approach would have been:

“primarily guided by the idea that the judicial system of the European Union, in so far as it is based on mutual trust and sincere cooperation between Member States, is inherently incompatible with the possibility of Member States establishing, in their bilateral relations, a parallel dispute settlement mechanism which may concern the interpretation and application of EU law” (§105),

He concludes that the relationship between the EU and Canada (or other third States) does not rely on the same principles.

AG Bot finds that CETA provides sufficient guarantees in order to preserve the exclusive jurisdiction of the CJEU over the definitive interpretation of EU law since the applicable law before the CETA Tribunal consists exclusively of the relevant provisions of that Agreement as interpreted in accordance with international law, excluding the domestic law of the Member States and EU law, which can only be taken into account by that Tribunal as a matter of fact, especially taking account of legitimate objectives in the public interest.

AG Bot envisaged that there would be few occasions when the ICS would interpret EU law, and then it would be

“… bound by the interpretation of EU law given by the Court, which Article 8.31.2 of the CETA requires it to follow, whereas neither the Court, nor the institutions of the European Union, nor the national courts or authorities are bound by the interpretation of EU law made by the Tribunal” (§138).

He noted also that the decisions of the ICS are subject to review by an appellate body, which offers additional guarantees that the correct interpretation of EU law would be applied.

AG Bot noted also that the ICS does not affect the role of EU national courts of ensuring the effective application of EU law, nor the power (or obligation) of those courts to request a preliminary ruling from the CJEU since it

“does not restrict the substantive rights enjoyed by foreign investors under internal EU law” nor “does it have the effect of limiting the jurisdiction of the Court or of the courts and tribunals of the Member States to hear and determine actions brought with a view to ensuring the observance of such rights as are afforded by internal EU law”.

The EU principle of equal treatment (§§185-213) was not infringed since European investors who invest in Canada are in a similar situation with Canadian investors investing in the EU. Their situation is not the same as European investors investing within the EU. But also, the purpose of encouraging foreign investments in the EU would justify a difference in treatment. Similarly, the EU principle of effectiveness of EU competition law (§§214-219) was not threatened by the ICS, (for e.g. by awarding damages equivalent to the amount of fines imposed by the European Commission or a national competition authority). CETA acknowledges that the Parties may take appropriate measures to prevent anti-competitive behaviour and guarantees the right to achieve legitimate objectives in the public interest.

In relation to fundamental rights, AG Bot found that the ICS does not breach the right to an independent and impartial tribunal. It is an alternative method of dispute settlement, providing sufficient procedural guarantees (in particular as regards the tribunal members’ remuneration schemes, their appointment and removal, and rules of ethics) (§§220-271).

Conclusion

Normally the CJEU follows the Opinion of its Advocates-General, and the final Opinion of the CJEU will be an important ruling for future FTAs negotiated by the EU. In this case, it is not certain whether the CJEU will agree with AG Bot’s reasoning but the CJEU may take the view that new forms of FTA require new forms of alternative dispute mechanisms and these may be tolerated. For the UK, this Opinion indicates that the EU may be open to using new fora to settle commercial disputes, providing that the basic tenets of EU law, substantive and underpinning principles, are guaranteed.

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One Comment

Brexit has evolved from a simple flag waving protest movement in the UK where Nation hood and Gingoisim was the clarion call to the disillusioned to rally around in return for good jobs return of national sovereignty and Control of our Money .Now it simply and only about Control of Money .

Since the bank crash of 2008 both the ECB and Bank of England have been issuing bonds to refinance both banks and Nations the Federal reserve also issues paper and that is exactly what all these bonds are just paper unless the issuing banks can get investors to take these instruments off their hands and into general circulation the whole house of cards will collapse .

There were originally two Reserve Currencies The Dollar and the Pound now we have the Yen and the Swiss Franc making Four with the Euro struggling to be taken serious as a reserve currency and since President Trump and his trade wars the Euro has been undermined by a simple threat of tariffs this weakness has not gone un noticed by the ECB so now they are going head to head with the weakest of the Reserve Currencies for supremacy and the prize is marketability of bonds held by the prospective banks .

Brexit has nothing to do with Irish Borders peace or the price of Onions or beef .It is a currency War plain and simple .If the EU back down and don’t stand united with a member and especially a member of the single currency then investors ask ,how united are the EU ?How strong is the ECB? Can we trust the Euro ?Will we invest in Euro denominated paper ?On the United Kingdom side if they agree to being a Vassal State of the EU then who controls the Pound ?The Bank of England have Safe loads of bonds they issued to refinance banks and Government that needs to be normalised into the markets .

With normalisation of interest rates and inflation stuttering in both the UK and EU .The
Feds rate increases are looking attractive to corporate and National investors while both the Pound and Euro are laggards in the market .Who blinks first will be the big loser in this Currency War ,May Knows it and Barniea knows it both are dancing around the real issue concession will be treated as weakness .The real prize here is Currency Status Does the Euro come of age as a Reserve Currency .Britain have stumbled into this battle as an unintended consequence of the Brexit vote .